The Bank of Israel is imposing new restrictions on the mortgage market today (Sunday) following the continued rise in housing prices and mortgage volumes.
Banking Supervisor Dudu Zaken today published a draft directive requiring banks to increase their capital buffers against the mortgages they distribute to homebuyers. Theoretically, the restriction is supposed to create a situation in which banks will "roll over" the costs to mortgage holders, meaning they will raise mortgage interest rates.
The directive states that beyond the targets set by the Supervisor for the Tier 1 capital ratio for banking corporations (9% by 2015, and 10% by 2017 for the two largest banks), banking corporations will be required to increase the Tier 1 capital target by a rate that reflects 1% of the housing credit portfolio balance. The effective date for meeting the capital target set in the draft directive is January 1, 2017, with implementation to be gradual.
Want more news, videos and stories? Join the Haredim 10 WhatsApp channel >>
""The draft directive was published in light of the ongoing growth in housing credit and, in part, in the total bank credit portfolio," the Bank of Israel said. "The purpose of the directive is to increase the capital cushions that the banking system allocates against the housing credit portfolio, due to an increase in the risks inherent in this portfolio, thereby strengthening the banks' ability to absorb unexpected losses and strengthening financial stability as a whole.".
The Bank of Israel explains that the reason for the new restrictions is a concern about the increased risk level of the banks' mortgage portfolio: "In examining the risk inherent in the housing credit portfolio, there is concern that the continued expansion of housing credit increases the risks in this portfolio, mainly in light of the correlation between the risks inherent in the housing credit portfolio and the credit portfolio for the construction and real estate industry and the correlation between the housing credit portfolio and the consumer credit portfolio granted to households. In this context, we note that the average annual growth rate of consumer credit (credit to individuals other than housing) has been approximately 71% in recent years (Figure 3 and Figure 4).".
The new directive will require banks to allocate an additional 2.7 billion shekels to their mortgage portfolio. As a result, bank shares are falling on the stock exchange today, dragging the market down.
Old man: Risk assessment is lacking
""Experience around the world shows that crises in the banking system often develop as a result of banks' exposure to housing credit and the real estate industry, and especially against a backdrop of accelerated expansion of mortgage volumes," Zaken said. "There is concern that the assessment of the risks inherent in the housing credit portfolio, particularly given its weight in the bank credit portfolio, is deficient, among other things, due to the fact that during boom times the repayment history of housing credit borrowers is good compared to other types of credit.".
